Capital adequacy ratio regulations and accounting choices in commercial banks

This study examines a commercial bank manager's incentives to reduce regulatory costs imposed when the bank's capital adequacy ratio falls below its regulatory minimum. It also tests the general political sensitivity hypothesis that a manager seeks to reduce political costs incurred when revenue is unusually large. Tests of adjustments to the loan loss provision, loan charge-offs, and securities gains and losses attempt to control for exogenous economic conditions and previous investing decisions. Results are consistent with hypotheses associating accounting adjustments with capital adequacy ratio guidelines, but fail to support the political sensitivity hypothesis.